We see current valuations on the majority of the stocks as fair and expect earnings rather than multiple expansion to dictate future stock performance. While we continue to believe biotech deserves to trade at a premium multiple to the S&P (given its superior growth profile), we find it difficult to make a case for continued multiple expansion (or a higher premium relative to S&P) or lower discount rates...

As a result, Goldman Sachs analyst Terence Flynn and team cut Alexion Pharmaceuticals to Neutral from Buy and Celgene to Sell from Neutral. Their top picks: Amgen ( AMGN) and Regeneron Pharmaceuticals ( REGN).

Yet Goldman wasn't the only investment bank out with a biotech note this morning, though they're feting far less play because a) there's no big sector downgrade and b) they're not Goldman Sachs. Take Citigroup's Yaron Werber and team, who see more biotech upside, even while noting the sector's sky-high valuation. He writes:

While the fundamentals are better than the S&P500, we anticipate that generalists will move away from biotech to other sectors when the macro environment improves. Until then, largecap biotech will continue to draw in funds...we anticipate that this group will remain strong in '14...but likely will post appreciation that is driven by EPS growth...any P/E multiple expansion will likely require upside surprise from pipelines.

Basd on Weber's analysis, however, only Celgene and Regeneron are trading below their discounted-cash-flow values, and he sees earnings upside for Celgene and Gilead Sciences ( GILD

Janney Capital Market's Kimberly Lee also offers a more nuance view than the title of her report, "Time to Invest in Biotech," suggests. She writes:

Given the significant run-up in the biotech indices versus the S&P 500 index in 2013, (BTK +55%; NBI +68%; SPX +29%), we find that investors are focused on what 2014 holds for valuation of the sector and which companies could outperform this year...Even though we are hopeful that the biotech sector could continue to demonstrate positive performance in 2014, we suggest investing in a basket of stocks that include profitable and non-profitable companies with both marketed and developmental-stage products and value-driving catalysts to minimize volatility in the portfolio.

Lee rates Alexion a Neutral.

So there you have it. Everyone worries about the same issues--high valuations--and they all further upside dependent on earnings.

[We] looked back at 2012 and 2013 original [biotech] guidance and compared to actual reported results. The conclusion...was clear: 1) [Amgen, Biogen ( BIIB) , Celgene and Gilead] have a strong recent history of beating original guidance by as much as 3-12% by year end, thus setting up the year nicely for investors. 2) In nearly all cases, actuals or consensus ended up exceeding the top end of original guidance....

We think his is particularly attractive to large-cap generalist portfolio

managers who are seeking strong top and bottom line organic earnings

growth stories with an ability to exceed consensus and potential to raise

guidance through the year - particularly in a tough macro-environment.

This is part of why these stocks did so well in 2013 (and why [Celgene] had

a full on re-rating in 2013). We recommend large cap biotech for 20%

EPS growth and upside potential...

Yee call Gilead his best idea, while he deems Amgen the least risky.

Shares of Celgene have dropped 4.8% to $161.68 at 11:08 a.m., while Regenron has fallen 1.2% to $268.49, Alexion has declined 2.3% to $128.74, Amgen has dipped 0.3% to $114.10, Gilead is off 1.5% at $73.23 and Biogen has dropped 1.4% to $273.46.

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